Transparent or Not, It Makes Plenty of Sense to Look Beyond Tax-Exempt Charitable Gifts

Last week, Mark Zuckerberg and his wife, Priscilla Chan, indicated they were going to give away 99 percent of their Facebook shares  currently worth approximately $45 billion  to help “improve the world for the next generation.” (They are pretty sure they can survive on the remaining $450 million.) This news, though, triggered a decidedly mixed reaction, since the couple also announced they were creating the Chan Zuckerberg Initiative, an LLC corporation, as the vehicle that will address this mission. The Zuckerbergs said they were going to use the LLC because it “provides great flexibility for the most impact.”

Pierre Omidyar, eBay founder, and his wife Pam are also big philanthropists, but since 2004, they've worked through the Omidyar Network, which operates like a traditional charity and also has a limited liability company (LLC) arm. And Laurene Powell Jobs, widow of Steve Jobs, also uses an LLC for her giving.

The headlines cry that the use of an LLC raises transparency issues. Transparency — a concept that everyone believes is the holy grail of every organization these days. Seven years ago, a young senator from Chicago was elected president promising the most transparent presidency in history. The presumption is that if something doesn’t have transparency, it is basically and intrinsically flawed.

In the old days of charitable organizations, when a wealthy donor set up a private foundation  — the traditional way of disbursing large sums of money to 501(c)(3) charities  —  those foundations were subject to rules, regulations, IRS review and public reporting obligations. A great deal of transparency. Probably because of this, people have come to believe that they are entitled to such transparency when it comes to the philanthropic lives of wealthy people.

Before we actually get further into the LLC issue, let’s take a minute to examine why the law imposes rules and regulations on private foundations, why they are monitored by the IRS and why they have their tax returns open to public inspection. The first important concept to note is that when a wealthy taxpayer makes a contribution to his or her private foundation, that person gets to deduct that amount from their income tax return. This saves the taxpayer approximately half of the donated amount in federal and state income taxes.

Now, in theory, the federal and state budgets are balanced. This means that these governments spend what they collect in tax revenues. Or, looking at it the opposite way, they need to raise in tax revenues the amount they intend or need to spend. Therefore, when one taxpayer reduces her tax burden via something like making a deductible charitable contribution, the rest of us taxpayers must make up for this loss of revenue in order to keep the budget in balance. When a billionaire saves 50 percent of his donation amount in taxes, the rest of us are (theoretically) taxed more than we would be if the billionaire did not make the charitable donation.

Therefore, all citizens are supporting charitable organizations whether we donate directly to them or simply pay additional taxes to compensate for philanthropic donations deducted from tax returns. This support for charities comes at a price, however. Charities are accountable to the citizens—all the citizens. This accountability is managed through rules, regulations, IRS monitoring and public disclosures  — in other words, transparency!

Next, let’s think about charity, donations and giving. According to the dictionary, charity is being generous in one’s actions or in making donations to aid the poor, ill, the helpless, etc. Donations, the dictionary tells us, are gifts, perhaps to a fund. Lastly, a gift is something given voluntarily without payment in return. The IRS calls a gift a “unilateral transfer of something of value”.

The Zuckerbergs, the Omidyars and the widow Jobs have indicated that they are going to make gifts to organizations and causes that they believe will benefit society. They are choosing to take some or most of their wealth and give it away, expecting nothing in return except the potential of a better planet. Everyone else on the planet should be thankful and happy that these wealthy people feel this way.

Nothing is obligating them to give their wealth to 501(c)(3) charitable organizations. They are free to invest in for-profit social enterprises or make gifts wherever they believe a need exists. Some of the recipients of their gifts may not be to established 501(c)(3) charities and, as such, are organizations or causes they would be prohibited from supporting if their wealth was tied up in a private foundation. Because these philanthropists see some needs that are being met by organizations that happen not to be 501(c)(3) charities, they realize that operating through an LLC provides them more flexibility than locking themselves into a private foundation and the tax-exempt charity industry.

With an LLC, the wealthy are free to invest in whatever organizations, causes or businesses they believe deserve their financial support. This does not make them less charitable. And since expenditures such as these are not deductible from their income tax, there is no obligation for complete transparency. Giving away your wealth is a basic American freedom.

In reality, however, the Zuckerbergs, the Omidyars and Ms. Jobs have actually been very open and public about the causes they financially support. Some recipients just happen to be outside of the tax-exempt charity industry. No one should be complaining about this.